Unless you’re one of the lucky and tiny minority, you know that searching for a financial planner is a daunting task. To say the least.
We get a lot of emails in from readers telling us just that. The fact is, it’s nearly impossible to find a planner that will act in your best interests rather than their own. Let alone one who is adequately qualified to manage your hard earned money.
So how should you go about selecting a financial planner? The simple answer is, don’t bother.
The wrong decision has the very real potential to wipe out your financial security, your retirement, and your plans for the future.
The industry is ‘absolutely appalling’, as described by ASIC Chairman Greg Medcraft. He goes on to say, ‘It has absolutely broken my heart to see what financial advisers have done and what they continue to do to people.’
If that’s not enough to put you off of the financial planning industry, I’ve looked at the tips commonly offered to help you search for a financial planner. Unfortunately, even these so-called ‘help’ sites won’t guarantee that you’ll get useful advice…
In fact, every source I researched offered more or less the same, tired advice…
Check for an AFS License’
Well, duh. It’s illegal to provide advice without having a license to do so.
An advisor boasting about having an Australian Financial Services License (AFSL) is like a doctor bragging they graduated from medical school. It could very well be because that’s all they’ve got going for them.
And beware. In many cases it will be. To be fully qualified as a financial planner in Australia there are no other requirements. You could fail grade seven and still make it in this industry!
The majority of fraudulent and deceitful practices by financial planners are carried out by licensed advisors. In the recent senate inquiry into the industry, Commonwealth Bank identified 400,000 customers who have lost money due to poor advice by its licensed advisors. And that’s just one bank.
Check ASIC’s financial advisers and ban registers’
ASIC’s register of financial advisers only went live last month. You can find it on ASIC’s MoneySmart website. The register details whether a financial planner can provide advice on investments, superannuation or life insurance.
The ban register has been in place for some time. And though it can tell you if a planner has had his license pulled for serious breaches of conduct, the ban list tells nothing else about a planner’s past…or qualifications to manage your wealth.
It’s all too common for planners being investigated to resign from one role, then pop up at another firm soon after.
Take Commonwealth Bank planner Stuart Jamieson, for example. Jamieson was caught forging customers signatures and was expelled by the Financial Planning Association.
But when allegations of misconduct were uncovered in an internal investigation by the bank, his managers allowed him to resign rather than be fired. His decision to leave CBA meant he was able to go on to two further jobs in the finance sector without clients knowing anything about his sordid history.
You need to know that the banned planners showing up on ASIC’s register are just the tip of a much larger rotten iceberg.
Remember Robyn and Merv Blanch? I mentioned them in yesterday’s Daily Reckoning.
The couple were preyed upon by rogue financial planner, Don Nguyen. To summarise, the advisor placed them into high risk investments that were utterly inappropriate for their circumstances. They lost $160,000 of the $260,000 they invested.
Nguyen had previously been suspended by the bank for illegal and deceptive practices involving forgery and inappropriate advice. Yet the bank reinstated, and even promoted him during this time. Ngyuen was also allowed to resign rather than be fired.
Why? Because he was considered a ‘star performer’. And the banks protect their star performers.
Now you might be surprised that a star performer would have lost his clients so much money. But the truth is that star performers are not those advisors who best manage their clients’ money. They are the ones who make money for the bank. They do this by shifting clients’ funds into costly bank-owned managed funds and insurance products.
Ask people who seem to be having success with investing who their advisors are’
The logic being this wonderful snippet of advice is that if your friends and family are happy with their advisor, then that person will be a good match for you.
Look, it’s nice to know the advisor in questions hasn’t lost your friends any money…yet. And they’ve likely got good customer service skills, so they’ll return your phone calls.
That’s nice. But it gives you very little reassurance that they are knowledgeable or competent in the particular areas relevant to your own financial situation.
When deciding on a financial planner, here’s what you really need to consider…check the planner’s pay structure
Many planners now receive a fee for service, but many also receive commissions, especially for insurance. The big financial institutions including, CBA, ANZ, Westpac, NAB, and AMP, all make commissions on products they sell you. Be particularly wary of advisors trying to push insurance products.
Planners working for the major banks and wealth management firms are rewarded for placing you in the bank’s products — not in the most suitable investment for your unique situation. Their incentives are tied to sales, rather than being aligned with your interests.
What’s more, each of these institutions support the government’s decision to wind back the Future of Financial Advice legislation that made it harder for planners to receive trailing commissions. That is, ongoing commissions they receive for dropping you into a product and not giving it a second thought.
What’s their education and experience like?
The average financial planner is no financial guru. Far from it. They’re salespeople, adept at funnelling your funds into investments that benefit them.
‘There is no specific qualification to become a financial advisor. Rather you must complete training in areas in which you will be providing advice, where the minimum requirements to comply with Tier 1 RG 146 are broadly equivalent to the ‘diploma’ level.’
That’s from CPA Australia, one of the many companies providing ‘training’ for financial planners. That’s it — not a bachelor’s degree — not even a high school certificate, but a ‘diploma equivalent’, which can be completed in as little as a week.
Even those acting in good faith, and with their compensation aligned with your interests, are often woefully underqualified. They lack the education to fully understand the products they are pushing you into.
Better yet, take back control and avoid planners altogether
The number one way to protect your hard earned cash from the often greedy and inept hands of financial planners is to take back control. Educate yourself and understand your investments. And it’s not nearly as hard as the ‘insiders’ would have you believe.
There’s no need to be intimidated. Since August last year, thousands of members of the Australian Investors Club have taken back control and of their finances.
They have learned that they can grow their wealth in low-fee investments and keep risks to a minimum.
In fact, my recommendations for members of the Club have performed six times better than the Australian market. And by applying my risk management strategy, those returns came with much less risk than handing your life savings over to some financial planner with their own interests in mind.
You can do much better, with less risk and far lower costs.
How? Keep an eye on your inbox on Saturday for all the details.
for The Daily Reckoning